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Secondary Market and Futures Market for the Provision of Gas Pipeline Transportation Capacity

Abstract:
The natural gas pipeline transportation industry has a long history of regulatory interventions limiting the market power of the pipeline owner. Most studies, however, focus on the static efficiency of the corresponding contract structures. For more realistic results, we consider transportation capacity as a durable good and analyze the dynamic efficiency of structures such as leasing and the selling of tradable rights with or without secondary markets and futures markets. Compared to a lease contract structure where the pipeline owner controls the transportation capacity at all periods the selling of tradable rights with a competitive secondary market dissipates the monopolist's market power and leads to higher social welfare. However, the monopolist's articipation in the futures market can reduce welfare by providing him with a credible way to restrain production in future periods, thus restoring the market power he enjoyed in a lease situation.

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Energy Specializations: Energy Investment and Finance – Trading Strategies and Financial Instruments; Energy Modeling – Other; Natural Gas – Pipelines ; Natural Gas – Policy and Regulation

JEL Codes:
G13 - Contingent Pricing; Futures Pricing; option pricing
C59 - Econometric Modeling: Other
N5 -
E60 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook: General

Keywords: Gas pipelines, futures market, welfare, market power, natural gas

DOI: 10.5547/ISSN0195-6574-EJ-Vol24-No1-2


Published in Volume 24, Number 1 of The Quarterly Journal of the IAEE's Energy Economics Education Foundation.